Monday 27 January 2020

Landlords deluded on rent levels as Amazon shares break $1,000

Jeff Bezos has built Amazon into an online powerhouse
Jeff Bezos has built Amazon into an online powerhouse

This week, Amazon's share price topped $1,000 for the first time. It's a fourfold increase on four years ago.

It's also a landmark event that retail landlords, economists and city planners ignore at their peril.

Put simply, Amazon (and online channels like it) are obliterating high street shops. Unless rents come down, those shops will soon disappear.

In Ireland, the most recent figures show that a booming Irish economy is bypassing physical goods retailers and going straight to online channels such as Amazon.

Commercial real estate firm CBRE reported that Irish economic growth drove an 18pc surge in online sales and a fall in offline retail sales of 2.5pc in the last year.

Worse, commercial vacancy rates in most Irish cities rose. In Sligo, the vacancy rate has leapt from 13pc to an astonishing 21pc.

Cork's vacancy rate has risen to 10pc, according to CBRE, while Limerick's has risen to 8pc.

Dublin, which has been undergoing an unfettered boom for the last 18 months, has seen its vacancy rate rise very slightly to 4pc.

Seeing any pattern here?

CBRE isn't. Its executives still expect retail rents to rise, at least in Dublin. The rationale appears to be that because prices per square metre in Dublin are 37pc lower than the top prices reached during Ireland's property boom, they will rise to that level again.

Aren't they paying attention to what's going on?

Figures from the Central Bank show online sales up 50pc in Ireland over the last two years.

That's not concert tickets, flights or books. It's clothes, electronics and cosmetics. It's the stuff that city and town shops need to sell to pay their rents.

As one Ibec economist put it this week, it is not out-of-town or cross-border shopping that is "hollowing out" Irish towns and cities. It is ecommerce.

This is why Amazon is now at $1,000 per share.

A recent PricewaterhouseCoopers report into Irish shopping habits found that a quarter of Irish people now shop online every week. It found that a whopping 23pc bought "most or all" of their clothes online last year. The PwC report suggests this will continue to increase. Ireland's online migration curve follows the UK, where 43pc of shoppers now shop online every week.

All of this has happened before we sort out shopping on our phones. Almost half of Irish people, in the midst of a switch to large-screen smartphones, say they have yet to buy something on a phone. I'm not sure whether CBRE executives still use Nokias and Blackberrys, but the vast bulk of shoppers now use new, high-powered phones with large screens to browse on.

Against all of these indices, it's curious that commercial landlords think there is still space to raise rents for city shops selling clothes or general goods.

I recently spoke to one Dublin-based electronics goods retailer who faced a 50pc increase in his shopping centre unit's rent. Faced with competition from online retailers, he couldn't afford it. The landlord refused to yield so the retailer abandoned the unit. As of last month, that unit was still vacant. It's probable that no other electronics retailer will be able to afford that rent. (Ironically, the retailer has now opened a store on Amazon and says that his business is booming.)

Of course, it's not all oblivion. Restaurants, cafés and budget stores appear to be flourishing. What they sell is less substitutable (or not at all) by online channels. Penneys, for example, thrives because postal expenses cancel the value of shopping online for €12 shirts.

Brown Thomas and other genuinely boutique retailers could be regarded as a destination by shoppers, a chance to physically browse rare, expensive items. And you can't sell a €3 cup of coffee online.

But in the middle tier of general goods, it's a different story.

Entities such as Asos or are pummelling retailers such as H&M and Debenhams Ireland, which filed for bankruptcy last year.

This echoes developments in the US, where once-powerful chains such as Macy's and Sears are shrinking and retail bankruptcies are soaring. Like Ireland, the US has a growing economy. But that doesn't mean a growing offline retail sector.

In the long term, it probably doesn't matter whether commercial landlords lower their rents now or hold out and accept growing vacancies. Online retail will continue to batter offline retail for logical, natural, economic reasons.

So even if they lower rents, occupancy rates for certain types of retailers may be irreversible.

In short, it looks like headed for a future where our city streets are made up of restaurants, cafés, personal services outlets and budget superstores.

Indo Business

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